Officials of a bankrupt Arkadelphia insurance agency ignored red flags indicating owner Berry Bishop was committing bank fraud, according to a trustee suing to recover $7.3 million.
If former Vice President Nathaniel A. Price and former Treasurer and CFO Pamela G. Frazier had acted prudently, Alliance Insurance Group of Arkadelphia Inc. “would still be one of the top 10 largest independent insurance agencies in Arkansas,” according to a lawsuit filed May 28 in Alliance’s bankruptcy case. The Chapter 7 trustee, M. Randy Rice of Little Rock, filed the suit.
The suit makes it clear that Bishop acted alone in his loan fraud but says his crimes were possible only because Alliance’s management team failed to provide oversight to the agency. The firm’s insurance license was yanked in 2018 in an emergency suspension order by the state insurance commissioner.
Rice is seeking the $7.3 million — the total amount the insolvent Alliance owes its creditors — from Price and Frazier.
If the trustee gets a judgment against them on allegations that include breach of fiduciary duties and gross negligence in the execution of professional services, the former officers then could file a claim under the agency’s errors and omissions insurance policy.
Both Price and Frazier denied the allegations of wrongdoing in their responses, filed last week in U.S. Bankruptcy Court in Hot Springs.
Price referred questions to his attorney, Eric Hughes of Arkadelphia, who declined to comment. Frazier didn’t respond by press time to a letter from Arkansas Business that was mailed to her Arkadelphia home. She is representing herself in the lawsuit.
The case provides some insight into the collapse of the Alliance Insurance Group and provides a cautionary tale for company executives.
The lawsuit said that Bishop, 69, who is serving a five-year sentence in federal prison for bank fraud, created a culture within the management team where no one questioned his authority.
Bishop paid Frazier an above-average salary for her skills to buy her “blind loyalty,” the suit alleges. Price and Frazier’s “actions displayed loyalty to Mr. Bishop even when his actions deviated from what was in Alliance’s best interest.”
Price, Bishop’s son-in-law, was promoted to vice president in 2012, making him second in command at the agency, according to the lawsuit filed on behalf of the trustee by attorneys Kathryn Reid and Gregory Bevel of the Dallas law firm Rochelle McCullough. But there was a “glaring power imbalance between [Price] and his father-in-law,” the suit said.
Price, in his response, denied that he was second in command.
The lawsuit should serve as a warning to company officials, said Kevin LaCroix of Beachwood, Ohio, an attorney who has been involved in directors’ and officers’ liability insurance for nearly 40 years.
“You shouldn’t have to put your own personal financial interests at risk to wind up being the fall guy for somebody that’s up to this conduct,” he said.
Company officials should protect themselves and report wrongdoing, even if the person being reported is a family member or paying generous salaries, he said. “Because you know, those few extra thousand dollars you may be getting pales in comparison to the $7.3 million loss,” LaCroix said.
One Crime After Another
In 1989, Bishop became the president and owner of Alliance, which was founded in 1951.
“Mr. Bishop was obsessed with making Alliance the biggest and best insurance agency in Arkansas,” the suit said. That fixation drove Bishop to make “poor financial decisions for himself and for the company.”
Over the years, Bishop bought several books of business from other agencies, including the Douglass-Newman Insurance Agency, which expanded the firm into Hot Springs in 2014. Alliance also had an office in Prescott.
Also in 2014, Bishop was president of the Independent Insurance Agents of Arkansas.
“And [Bishop] remained hyper-focused on paying the best salaries, the best benefits, and providing his agents with the best incentives in the business despite the company’s dwindling cash reserves,” the suit said.
Eventually he needed to supplement his agency’s revenue.
“Years and years ago,” Bishop forged a client’s name on a premium finance loan, Bishop’s lawyer, Tyler Tapp of Hot Springs, said at Bishop’s sentencing hearing in November in U.S. District Court in Hot Springs. Tapp didn’t say exactly when that forgery happened, but “that criminal act, as it often does, led to many, many more.”
The interest for that first loan came due and Bishop didn’t have the money to pay it back. “So he had to get another loan,” Tapp said. “And through the years, … that interest grew and grew. … That interest forced Mr. Bishop to continue to commit criminal act after criminal act.”
The trustee’s lawsuit said that Bishop received millions of dollars in loans to fund Alliance. Some of the borrowing might have been valid at first, but by late 2016, Alliance didn’t have the money to service its mounting debt, the suit said.
From November 2016 to September 2017, Bishop hatched a scheme to get money by obtaining premium finance loans from the Bank of Prescott. He told the bank that he had the authority to borrow money on behalf of several Alliance customers. The unearned premiums were used as collateral for the loans, and Bishop entered into loan agreements on the customers’ behalf without the customers knowing about it.
During that period, Bishop received more than $4 million from the bank. In addition, Bishop’s scheme to obtain money also included other banks, friends and even his father-in-law, the trustee’s lawsuit said.
“To carry out and conceal this scheme, Mr. Bishop made repeated and ongoing misrepresentations and omissions to banks, insurers, insureds, and finally, his own management team,” the suit said.
Lack of Oversight Alleged
The trustee said in the suit that Price and Frazier failed to exercise “any reasonable oversight” of the agency’s trust account management and premium financing services.
The trustee said that Price and Frazier had access to and signatory authority over Alliance’s bank accounts. And had they “simply looked” at one of the account bank statements, “they would have seen irregularities right away given how often that account was overdrawn,” the suit said.
The account was “repeatedly overdrawn in late 2016” and the pattern continued into 2017, the suit said. Of the 45 banking days between July and September 2017, Alliance was overdrawn 33 of those days, with an average overdraft of just under $60,000.
“An overdrawn trust account … is a serious breach of trust account management protocol, and should be an immediate red flag to an agency’s management,” the lawsuit said. “But it was ignored by Defendants.”
In addition, Alliance frequently used a second account at the Bank of Prescott that also should have attracted a closer look, the suit said.
For that second account, Bishop signed the checks — instead of Frazier. And the statements for that second account were addressed to Alliance in care of Bishop. The other statements, however, were addressed to both Bishop and Frazier.
“In the context of fiduciary fund accounts, like an insurance agency’s trust fund account, knowledge of these red flags gives rise to a strong inference of wrongdoing,” the lawsuit said. “Defendants had this knowledge but intentionally failed to act in the face of a known duty to act, thereby demonstrating a conscious disregard for the duties as officers and fiduciaries.”
‘Financial Pressure’
In late 2017, the Bank of Prescott finally began quizzing Alliance about the accounts. It stopped lending money to the agency, “which put enormous financial pressure on Alliance as it had been relying on new loans to pay the old loans for months,” the suit said.
By that time, Bishop was shopping around for a buyer in hopes that selling the agency would pay off the debts. But a deal fell apart.
The fraud wasn’t revealed until early 2018 when a top producer in Alliance’s Hot Springs office discovered a financial statement that caused him to ask questions.
Meanwhile, Price and Frazier resigned “and left non-executive employees to figure out the mess,” the lawsuit said. “The trust account management and record keeping at Alliance was so poor, however, that it took weeks to fully reveal the extent of the losses, and that was despite Alliance having specialized financial software designed specifically for the needs of an insurance agency.”
Price said in his answer to the lawsuit that his authority to use the management system was limited. “He had no access to any part of the management system that provided financial information, information about trust accounting, information about customers that were not his personal customers, or other company wide information,” the filing said.
He also denied that he left the Alliance employees to figure out the mess.
LaCroix, the Ohio attorney who handles directors’ and officers’ insurance, said it’s difficult to be a whistleblower in any company.
“Often the case when there is fraud like that, it doesn’t go completely undetected,” said LaCroix, who was speaking generally and not familiar with the specifics of the trustee’s lawsuit. “And maybe in this case because of the family relations or the … compensation, there was sort of an extra willingness to overlook. And you know, often operators like that are very smooth at explaining things that don’t, at first glance, look right.”
‘We’re Moving Forward’
After the insurance licenses of Alliance and Bishop were suspended in April 2018, the Arkansas Insurance Department insisted that Price and other agents continue to serve Alliance clients, Price said in his filing, so he did.
Price then started Price & Co. of Arkadelphia, an independent insurance agency that handles all lines of insurance.
“We’re off the ground, and we’re moving forward,” Price told Arkansas Business in July 2018. “We’re out prospecting leads and turning those leads into quotes. And turning those quotes into customers.”
The trustee’s filing didn’t say what Frazier did after she left Alliance.
Meanwhile, the Bank of Prescott failed to recover from the losses tied to loaning Bishop millions on phony applications in the names of his clients. The $67 million-asset lender was sold last year to Farmers Bank & Trust of Magnolia.
Alliance, which had 21 employees, filed for Chapter 7 bankruptcy liquidation on May 30, 2018, listing $5.5 million in assets and $8.2 million in debts. Bishop also filed for personal Chapter 7 bankruptcy, listing just $8,650 in assets and $7.9 million in debts. Bishop personally guaranteed many of his insurance agency’s debts, resulting in the same debts being listed in both bankruptcies.
Last year, Bishop pleaded guilty to one count of bank fraud and was ordered to pay restitution totaling almost $4.13 million to six entities. He is serving his sentence at the low-security federal prison in Texarkana, Texas, and is scheduled to be released in April 2024.
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